FTSE 100 needs to raise its standards

AndrewPeaple

Enough. Two oligarch-controlled Russian mining companies with questionable corporate governance will enter London's flagship FTSE 100 index on Dec. 19. Polymetal and Evraz are the latest in a string of recent U.K. listings that have exploited loopholes in the FTSE rules to gain access to the index - and to the billions of dollars passively managed by index-tracker funds, side-stepping the initial public offering process. That has prompted an urgent review of the rules to prevent unsuspecting investors being exposed to inappropriate risks.

In response to protests from fund managers and groups representing major investors, the FTSE Group is now considering strict enforcement of the 25% minimum free-float requirement for U.K.-listed companies, according to several people involved in the consultation. If imposed, six current FTSE 100 companies - Fresnillo (FRES.LN), Essar Energy (ESSR.LN), ENRC (ENRC.LN), Ferrexpo (FXPO.LN), Evraz and Glencore - would have to raise their free floats.

But mandatory 25% free floats would still make it hard for minority shareholders to block special resolutions requiring a 75% majority. Given usual shareholder absenteeism, free floats of around 33%-40% are needed to ensure shareholder rights, say corporate governance experts. Indeed there's strong support for FTSE to impose a 50% free-float minimum for listed companies eventually. That could prove tricky: Royal Bank of Scotland (RBS.LN), for example, is 68%-owned by the U.K. government. Any such change would have to be phased in over a lengthy period of time.

Besides, stricter enforcement of the 25% requirement won't rule out backdoor listings. Only Glencore and Evraz would have fallen foul of the rule this year. Other options include requiring newly-listed companies to comply strictly with the U.K.'s corporate governance code. The FTSE could also introduce a separate index of companies with high governance standards. That would implicitly tarnish the FTSE 100's supposed gold standard. But without further reform, it's already in danger of losing its shine.

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